One of the most important factors to consider when building wealth is how to leverage your output. It will be difficult to build wealth if you have to continually work at a 1:1 ratio of input:output, or hours:earnings. What does that mean?
No Work, No Pay
Consider the hourly employee. If you make $25/hour your maximum output in any given day is maxed at $600 since your input is maxed at 24 hours. Along the way, however, you’re going to need to eat, sleep, and tend to some personal affairs. Therefore, your employer will likely limit you to an 8-hour shift. This means you’ll be limited to $200/day since he’s not going to pay you to watch Game of Thrones while eating dinner. Sadly, during that tv time, your earning power has ceased. No work, no pay – right?
I see a lot folks running from one job to another punching the clock or maybe tapping the Uber app. That money is earned in very a linear fashion where it is merely your time multiplied by your wage. That results in your pre-tax income as a 1:1 ratio, or hours:earnings.
Wealthy individuals have learned that no matter what their hourly income may be, they need to make money in a non-linear fashion. They need to operate in a way that leverages their output (their earnings) far beyond what they are capable of inputting (their time).
How does this happen? Equity ownership in companies, interest & dividend payments, rent & royalty payments, residual income streams, intellectual property, etc. These are examples of your money working for you, behind the scenes, and leveraging your output. Below, we’ll look at the most accessible for most, equity, interest, and dividends.
Even if you work for an hourly wage, if you can supplement your 1:1 earnings with stock options, stock grants, or stock purchase plans, that equity will leverage your hourly earnings with ownership of the company your work for. You’ll see the benefit of not just your work, but the work of everyone else in the company as well. That means when you clock out, your earnings can continue as others continue to produce!
Investments beyond that into broadly diversified retirement plans like a 401k and/or a Roth IRA will offer you a mix of stocks & bonds that can supplement your earning potential via other revenue streams as well.
You don’t have to be a John D. Rockefeller or a Warren Buffett to earn money while you are sleeping. And despite what Bernie Sanders or Elizabeth Warren may claim, there is absolutely nothing wrong with doing so. There should never be a time when the sun sets on your money making prowess.
By owning stocks you are making money via the output of other workers, earning the profit as they produce goods and services. You are doing so 24/7/365 across the globe when you invest in a mix of US, international, and emerging market companies. You should own large, medium, small, and micro-sized companies in industries of every facet across the globe.
Owning bonds means others are paying you to use your money. Lend your money to individuals, various businesses, foreign governments, and good ol’ Uncle Sam – he’s a very hefty borrower. They will all pay you interest 24/7/365 until the debt is repaid, at which point there are millions of other debtors standing in line, eager to sign another note.
By owning real estate you can collect 24/7/365 rent from those needing a place to live, house their business, or warehouse their goods. You can easily own real estate all over the world, from skyscrapers to apartment buildings to warehouses and housing developments. The great thing is you can diversify the risk and never have to answer a call from an angry tenant with a busted toilet.
The Money Machine
Reinvest the interest & dividends you’ll receive from all of your investments, so that your money-making machine runs itself in perpetuity by constantly compounding upon itself. As your investments generate cash by way of interest, dividends, and/or capital gains, that money is automatically used to re-purchase additional shares. Supposedly Albert Einstein called compound interest “The 8th Wonder of the World”. I don’t know if he really said it, but compounding is a beautiful sight to behold.
Add fresh capital to your investments at every available opportunity. Invest at least 15% of every paycheck, and more if you can. When you get a raise, don’t increase your lifestyle, increase your investment contributions. This is the very definition of wealth building! Use a “set it and forget it” approach, and avoid the temptation to watch the markets on a daily basis. Let your money machine do its thing…
Doing all of this will you allow you to earn money whilst sleeping, fishing, reading a book, watching a movie, or even while vacationing. That makes taking in the waves so much easier! On any given day after the US stock market closes, the Nikkei in Japan opens, with Korea, China, Russia, Europe, and then New York City opening up again in a continuous cycle. Your stocks, bonds, and real estate are always in motion. The action never stops, and it’s a really good feeling, trust me.
The ultimate goal is to get the input side of the ratio down to 0 and the output side up to the point where you can live comfortably on the money generated by your investments. That equates to financial freedom, a work-optional life, and the point at which you have successfully leveraged your output.
Cheers, and thanks for reading!